Tag Archives: Lifestyle

Funding retirement income in a low interest rate environment

By Robert Wright /November 23,2017/

While a traditional bank deposit is generally regarded as one of the safest forms of investment, it also currently offers among the lowest returns. For those relying on bank deposits to fund their retirement income, the current record low interest rate environment offers little reward.

For those approaching retirement, low interest rates could mean having to rethink their retirement goals, retirement time frame and potential sources of retirement income. For existing retirees, it could mean having to re-assess their goals. Simply put: low interest rates means more capital is required to fund future income needs.

This raises the question – if interest rates stay low for the foreseeable future, how can you fund the retirement lifestyle you’d hoped for?

Regardless of whether you are preparing for retirement, or are already retired, the answer lies in focusing on factors you can control, rather than those you cannot. Whilst there are many aspects of investing that can’t be reliably predicted, there are many factors you can control, including:

how much you spend;
how much you save;
how much investment risk you are prepared to accept;
how you structure your investments; and
how much you pay in fees.

For those still working, it could mean adjusting discretionary spending, so that more funds can be used to boost retirement savings, or additional mortgage payments can be made to reduce the amount owing, or a combination of both. Less spending now means more money for later.

For self-funded retirees, it could mean adjusting discretionary spending by taking fewer ‘big’ holidays or by considering the Age Pension in their future planning.

Inevitably, investors may feel compelled to move further along the risk curve to seek out the retirement income they desire. In other words, they may seek to diversify away from cash and invest a higher percentage of their capital in alternative forms of income producing assets – such as shares, property and infrastructure. This is often referred to as the ‘search for yield’.

Cash vs Alternative Income Assets

The cash rate in Australia is currently 1.50%, with some institutions offering around 3.00% depending on the deposit amount and timeframe. Compare this to shares, where it is possible to receive a 6.00% return (or more), often with the benefits of franking credits.

There are, of course, risks associated with growth assets that can’t simply be ignored, and investors need to feel comfortable that the value of their portfolio will fluctuate over time, as the assets respond to prevailing market conditions. Whilst a regular dividend can help to offset the impact of any future share price falls, there is no guarantee that dividends will continue to be paid at the same rate.

Managing investment risks can be achieved by:

buying and holding quality assets;
being prepared to stay invested for the long term; and
being prepared to ‘capitalise’ on over-heated markets.

Structuring your Assets

The overall structure you employ is the foundation to your portfolio and impacts the net return you receive. Quality assets, poorly structured, can lead to lower real returns.

For self-funded retirees, the decision to hold assets via a super fund or account based pension, or in their individual names can lead to very different results, in the form of:

Returns – some structures don’t pay tax on earnings, so holding assets in the right structure can lead to higher returns.
Benefits – some structures offer Centrelink exemptions, so holding assets in the right structure can lead to increased entitlements.

Understanding the difference between structures, and how these relate to you, can be complicated as they relate to an individual’s personal circumstances. This is one area that is definitely not “one size fits all.”

Fees

The fees you pay, whether direct or indirect, will also impact the net return you receive and can make a significant difference over the long term. Fees can generally be categorised into three areas:

Administration
Investment
Advice

It is important to have a good understanding of the total fees you are paying, to be satisfied that you are getting “value for money.”

As outlined above, it is clear that there are many factors to consider when it comes to deciding which approach is best for you. Now, more than ever, due to the current low interest rate environment, it’s worth reviewing your overall position to determine whether your current strategy remains relevant to your needs and lifestyle. Please contact us to discuss your particular situation.

Source: Capstone

August Economic Update

By Robert Wright /August 28,2017/

MARKET AND ECONOMIC OVERVIEW

Australia

The RBA’s July interest rate decision was complicated by the recent strength of the Australian dollar, largely driven by a weaker US currency. The RBA noted that: “the higher exchange rate is expected to contribute to subdued price pressures in the economy. It is also weighing on the outlook for output and employment. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
The RBA continues to balance three key risks in the economy for their monetary policy deliberations: the outlook for inflation, the strength or otherwise of the labour market, and household financial stability.
In other news, Q2 CPI data came in at a softer 0.2% per quarter, reducing the annual growth rate to just 1.9% per annum, a drop of 0.2 percentage points. As a result, inflation is now just below the RBA’s 2–3% target band.
The average of the two underlying measures, the trimmed-mean and weighted-median, was 0.5% per quarter, in line with expectations, with the annual figure rising to 1.8%, a slight increase on the 1.75% reading in Q1.
The most significant price rises over the quarter were in medical and hospital services (+4.1%), new dwelling purchases by owner-occupiers (+0.9%), tobacco (+1.0%) and beer (+1.0%). The biggest offsetting price falls included domestic holiday travel and accommodation (-3.2%), automotive fuel (-2.5%) and fruit (-4.4%). Weakness continued in clothing, with price discounting and competition in the segment. The price increase expected in fresh fruit and vegetables as a result of Cyclone Debbie was largely offset by price declines in seasonally available fruit such as apples, bananas and mandarins.
The NAB business survey for June showed business confidence strengthening, up one point to +9. Overall business conditions rose to multi-year highs with a reading of +15, up from +11 in May on the back of stronger trading conditions and profitability.
The June labour market report saw job gains continue, although there was a return to a more normal monthly gain of +14,000. The unemployment rate held steady at 5.6%.
CoreLogic capital city dwelling prices regained momentum in July, rising 1.5% over the month to bring the annual growth rate to 10.5%. Prices in Sydney and Melbourne remain elevated, rising 12.4% per annum and 15.9% per annum respectively. The monthly price moves by capital city were: Melbourne (+3.1%), Sydney (+1.4%), Adelaide (+1.1%), Brisbane (-0.6%) and Perth (-1.3%). Strength in the housing market remains, despite signs of a slowdown in investment lending following tighter macro-prudential measures put in place in March.

United States

The US Federal Reserve Open Market Committee (FOMC) met on 25–26 July and, as was widely expected, left the Fed Funds rate range unchanged at 1.0% to 1.25%. This decision is consistent with the Fed waiting to see a little more data before continuing on the path to normalise US monetary policy.
The Fed noted that: “The labour market has continued to strengthen and… economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand”.
The Fed also noted that: “near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely”.
Significantly, the Fed signalled that balance sheet adjustment will start shortly, reinforcing the general expectation that this will get under way at the next FOMC meeting on 20 September, provided the economy evolves broadly as the FOMC anticipates.
In other US economic news, newly released Q2 GDP data indicated a healthy rebound from weak growth in the first quarter. Real GDP rose by 2.6% on a seasonally adjusted, annualised basis, up from 1.2% in Q1. The improvement was underpinned by a 2.8% lift in consumer spending and a 5.2% increase in non-residential fixed investment.
Despite the better growth results, the ISM Manufacturing Index retreated, falling from 57.8 in June to 56.3 in July. New orders and employment fell, although they remain well above the long-term average.
US inflation was flat in June and once again weaker than expected, with the annual rate falling to 1.6% per annum, down from a peak of 2.7% per annum in February. Core inflation rose 0.1% per month and 1.7% per annum. Headline inflation remained suppressed, with weakness in energy prices, wireless phone services, and new and used cars. The Fed’s preferred measure of inflation, the Core Personal Consumption Expenditure Index, rose 0.1% per month and 1.5% per annum for June.
The labour market continues to perform well, with 222,000 jobs added in June, compared to 152,000 in May. Nonetheless, the unemployment rate rose to 4.4%, driven by a rise in the participation rate to 62.8%. Average Hourly Earnings also rose to 2.5% per annum, from a revised 2.4% per annum the month before.

Europe

The European Central Bank (ECB) met on 20 July and made no changes to policy. After the Bank moved to a more neutral view of growth risks and removed its asymmetric forward guidance on policy rates in June, there was some expectation that it may commit to a timetable for tapering its asset purchase program. But the ECB made no such commitment, instead deferring the decision to the northern hemisphere autumn and the next staff forecasts due in September.
Eurozone Q2 GDP data showed above trend growth of 0.6% for the quarter and 2.1% per annum, up from 1.9% per annum in Q1. But while this pick-up in growth has been reflected in better Euro area manufacturing PMI and services PMI data over recent months, The Markit Eurozone Manufacturing PMI retreated slightly in July, down from 56.8 to 56.6.
In better news, the Eurozone unemployment rate fell to new cyclical lows, falling to 9.1% in June, down from 9.2% in May. Headline inflation was also steady at 1.3% per annum for July, while core inflation rose to 1.2% per annum, up from 1.1%.
Greece returned to bond markets in July for the first time in three years, raising €3bn and issuing a 5-year bond that was twice oversubscribed with the yield set at 4.62%. While the credit rating for the newly issued bonds remains below investment grade, Standard & Poor’s raised its outlook for Greece from “stable” to “positive”, given recent cost cutting reforms and an expected return to economic growth.

United Kingdom

The Bank of England (BoE) did not meet in July, with the last decision on 15 June, where no policy changes were announced.
The BoE Board had a robust debate over the month on the future course of interest rates. The debate centred on the timing of moves to lift rates, while acknowledging that the economy doesn’t need as much stimulus as is currently being provided. Weak wages growth and uncertainty due to Brexit negotiations are likely to see the BoE hold off on rate rises in the near term.
UK headline inflation edged lower in June, with the annual rate down to 2.6% per annum from 2.9% per annum in May. Core CPI also retreated, falling to 2.4% per annum from 2.6% the month before.
The unemployment rate fell to a 42-year low at just 4.5% for the three months to May 2017, down from 4.6% in the previous three-month period. Unemployment fell 64,000 while employment climbed 175,000 as participation increased. Nonetheless regular earnings rose just 2% per annum.

New Zealand

The Reserve Bank of New Zealand did not meet in July. The cash rate has been on hold at 1.75% since 10 November 2016, when a 25-basis point rate cut was announced.
Q2 CPI was weaker than expected, staying flat over the quarter to bring the annual rate to 1.7% per annum, down from 2.2%. The lower-than-expected figure was driven by falling fuel, accommodation and transport prices. However, price pressures remain for construction costs and rents.

Canada

The Bank of Canada (BoC) announced on 12 July that it would raise its target for the overnight rate to 0.75%, as was widely expected. This was the first move in interest rates since the emergency rate cut to 0.5% in July 2015.
In raising the rate, the BoC noted that: “recent data [has] bolstered the Bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy”.
Although the BoC acknowledged that inflation has stayed soft, a lag between monetary policy actions and future inflation drove the decision to lift rates.
The Canadian domestic economy was described as “robust, fuelled by household spending” and the BoC noted that “as a result a significant amount of economic slack had been absorbed”.
On the outlook for interest rates, the BoC noted: “future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Bank’s inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities”.

Japan

The Bank of Japan (BoJ) met on 20 July and, as expected, made no changes to rates. It continues to maintain its policy balance rate at -0.1%, with a 10-year bond yield target of 0%. The BoJ pushed out the point when 2% inflation will likely be achieved to sometime “around fiscal 2019”.
The growth side of the economy is in better shape, with the BoJ upgrading its economic forecasts in July, as did the International Monetary Fund (IMF). They now expect growth of 1.3% in 2017, up from 1.2%.

China

In China, Q2 GDP data showed the economy growing at 1.7% per quarter and 6.9% per annum. While stronger than expected, this is the same annual growth rate as Q1 17. Monthly indicators also suggest stronger growth, with industrial production expanding by 7.6% per annum, up from 6.5%, and retail sales rising 10% per annum in the year to June, up from 9.6%. Healthy property and infrastructure investment, along with an easing in credit conditions, have helped build momentum in the economy.

AUSTRALIAN DOLLAR

After gains in June, the Australian dollar was stronger again in July, supported by rising commodity prices and expectations that the RBA could join other central banks in removing monetary policy accommodation, particularly after the Bank of Canada lifted rates. US dollar weakness was also evident as the market reduced the scale of future Federal Reserve rate hike forecasts on the back of weaker inflation data and reduced expectations of tax reform in the US given Congress’ failure to pass healthcare reform.

As a result, the Australian dollar rose 4.1% against the US dollar to $US0.8003, its highest level since May 2015.

The AUD also rose against the Sterling (+2.6%), the Euro (+0.4%), Japanese Yen (+2.2%) and NZ dollar (1.5%).

COMMODITIES

Commodity prices were generally higher in July, supported by a lower US dollar and further signs of a synchronised pick-up in global economic growth.

West Texas Intermediate (WTI) crude oil finished the month at $US50.17/bbl, up 9.0%. Gains were driven largely by a late-month fall in the US dollar and Saudi Arabia’s pledge to reduce crude exports.

Iron ore prices rose strongly in the month, with the spot iron ore contract (Qingdao 62% Fe fines) up by 13.5% to $US73.7/t. Stronger than expected economic growth figures in China and other industrial indicators helped propel the iron ore price higher.

Base metals were generally higher, with the London Metals Exchange (LME) Index rising by 4.4%. Nickel (+8.8%) and copper (+7.3%) rose strongly, helped by stronger Chinese economic data. Tin (+3.4%), lead (+1.8%) and zinc (+1.3%) also rose.

Precious metal prices were stronger, with gold up 2.2% to $US1269.44 an ounce. Silver rose 1.2%.

AUSTRALIAN EQUITIES

The S&P/ASX 200 Index finished the month flat (0.0%), despite some volatility. In a repeat of last month, there was considerable divergence in the performance between industry sectors.

With the Australian dollar continuing to rise against other major currencies, the biggest loser was Healthcare (-7.5%), since companies like CSL, Cochlear and ResMed derive a significant proportion of their earnings from overseas. Bond proxy sector Utilities (-5.3%) was impacted by rising bond yields, while Industrials (-2.9%) fell on a combination of a strong Australian dollar and rising bond yields. Telcos (-4.3%) were also dragged lower by sector giant Telstra, which has been under pressure on investor concerns around earnings and dividend risk.

On the positive side, the Materials sector (+3.5%) was strong on the back of rising commodity prices. Financials (+1.2%) were supported by the large banks, which rebounded after the better-than-expected ruling on capital requirements from APRA.

LISTED PROPERTY

The S&P/ASX 200 A-REIT index finished the month largely unchanged (-0.1%), having fallen by as much as 3.6% on global developments.

The industrial A-REIT sub-sector continued its run of longer term outperformance (+1.1%), again outpacing the retail (+0.6%) and office (-0.4%) sub-sectors over the month.

Among the better performing A-REITs in July were Vicinity Centres (+7.0%) and Rural Funds Group (+8.1%), whose investors supported a $78.6m capital-raising to strengthen the balance sheet. Vicinity announced a 5% buyback and asset revaluations, which boosted net tangible assets by 3.3%.

At the other end of the spectrum, Charter Hall Group (-5.6%) and Westfield Corporation (-4.4%) both fell over the month, with the market taking a dim view of Charter Hall entering discussions to purchase Westpac’s global infrastructure business, Hastings Management.

Listed property markets were stronger globally, with the FTSE EPRA/NAREIT Developed Index (TR) rising 1.9% in USD terms. Singapore was the top-performing region (+5.2%) and New Zealand the worst in US dollar terms, with the US in the middle of the pack at +1.0%.

GLOBAL DEVELOPED MARKET EQUITIES

Global developed equity markets recorded another positive month, as market volatility measures continued to fall to record lows.

The VIX Index, a market estimate of future volatility, reached a new low, falling to 9.36 on 21 July. Stronger global growth, good company earnings, large cash volumes on the sidelines and strong guidance from central banks helped to reduce volatility concerns, despite elevated political uncertainty in the US.

The MSCI World Index was up 2.3% in US dollar terms over the month, but down 1.5% in Australian dollar terms as the currency strengthened. The US dollar was weak in July and was one of the biggest factors impacting country specific returns.

In the US, the S&P500 (+1.9%), Dow Jones (+2.5%) and the NASDAQ (+3.4%) produced strong returns. MSCI Materials (+4.6%) outperformed following a rise in commodity prices, while MSCI Healthcare was flat as political uncertainty continued.

Equity markets in Europe were weaker, with falls in France (-0.5%) and Germany (-1.7%) driven by a strong Euro. In the UK, the FTSE100 rose 0.8% on signs the Brexit negotiations were progressing better than some had feared.

Asian markets were mixed, with the Japanese Nikkei 225 down (-0.5%), but Singapore (+3.2%) and Hong Kong (+6.1%) both making strong gains. Hong Kong was propelled higher by some Chinese property companies.

GLOBAL EMERGING MARKETS

Emerging market equities had another positive month, assisted by cyclical improvements in the global economy, commodity price gains and the weaker US dollar. The MSCI Emerging Market Index was up 5.5% in USD terms and 1.5% in AUD terms.

MSCI EM Latin America (+8.2%) rose strongly, helped by gains in oil and iron ore prices. MSCI EM Asia ex Japan gained 4.9% over the month, assisted by a 9% gain in MSCI China.

The MSCI EM Europe, Middle East and Africa was up 5.3%, led higher once again by oil prices, with Russia recording positive gains after falls in June.

FIXED INTEREST

July was a relatively stable month for bond markets, with more hawkish central bank themes being offset by continued political and geopolitical headline risks. The relatively low volatility speaks to both the resilience of markets and increasing confidence that global growth is on a healthier trajectory.

Central banks were hawkish, with the Bank of Canada increasing official interest rates for the first time since 2010, plus ongoing tapering discussions from the US Federal Reserve and European Central Bank. Geopolitical tension was driven by continued missile testing in North Korea and the response from other countries, the US in particular. US political uncertainty continued, with no progress on healthcare and ongoing headlines around the US presidency.

European 10-year yields rose 8 bps to 0.54%, but the US and UK were slightly down (1 bp to 2.29% and 3 bps to 1.23% respectively). The equivalent Japanese yields were flat month-on-month at 0.08%.

Australian government bond yields rose 8 bps to 2.68%. The rise was influenced by the release of minutes from the RBA’s Monetary Policy Board meeting, which were interpreted as overly hawkish.

GLOBAL CREDIT

Global investment grade credit spreads continued to tighten, but remain resilient despite wider market noise. While spreads are now the tightest since 2014, demand shows little sign of slowing down. Investment grade issuance in the US and Europe remained strong over the month.

The Bloomberg Barclays Global Aggregate Corporate Index average spread tightened by 7 bps to 1.02%. US credit also tightened, with the Bloomberg Barclays US Aggregate Corporate Index average spread closing 5 bps tighter at 0.98%. In Europe, the spread on the Bloomberg Barclays European Aggregate Corporate Index was 10 bps narrower at 0.92%, on the back of the ECB rhetoric.

US high yield credit spreads also tightened in July. The Bank of America Merrill Lynch Global High Yield index (BB-B) narrowed 16 bps over the month to 2.81%. The high yield market continues to be impacted by downgrades, particularly in the energy and mining sectors.

Australian credit spreads followed the global trend from recent months and moved tighter, with the average spread relative to swap on the Bloomberg Australian Corporate Index narrowing 5 bps 0.81%.

Source: Colonial First State.

Travel tips to help you spend less on your next holiday

By Robert Wright /August 28,2017/

It’s that time of year again when it feels as though everyone you know is escaping winter to head off across the world on a fabulous holiday (and sharing many photos to prove it).

Whether you’re about to head off on a travelling adventure yourself, or your planning is still in the dreaming stage, take note of these tips to ensure your hard earned break is as stress free as possible.

Be strategic about when you book

People generally set aside more time for their holiday planning on the weekends, however travel companies know this and tend to hike up the price. Generally prices start to climb on Fridays and can be the highest over the weekend. Try to lock in time for some weeknight research and ensure you check prices over a few days, as some sites (such as booking.com) have daily deals. You may just check one day to find your dream hotel is 30% off.

Are you being tracked?

While we’re on the topic of re-checking prices, be aware that some travel sites track the time you spend on their site by installing cookies on your browser, then raise prices if it’s clear you’re a repeat visitor. Be sure to enable private browsing on your web browser and clear cookies before you book. Alternatively, search on a friend’s computer to check you aren’t being overcharged.

Price match

Found a great deal online, but feeling a little uneasy about booking online? Some travel agents including Flight Centre and their affiliated brands, will price match if you bring in evidence of a cheaper fare. That way you get the best rate possible, as well as the peace of mind that if anything goes wrong, you have a personal travel consultant you can contact for assistance.

Make copies of important documents

It’s everyone’s biggest fear that they will lose their passport while overseas. While it’s a huge hassle in any situation, it’s 10 times better if you have photocopies to refer to. Better yet, email it to yourself so there’s no possible way the copy can be lost. The same goes for other important documents including travel insurance details, credit cards and secondary ID. You don’t want to get stuck in a situation where you could lose your bookings or even worse, miss a flight because you simply misplaced something.

To cash or card?

Firstly, ensure you always tell your bank when you’re going to be using a card overseas – the last thing you want is your bank placing a hold on your credit card and having to sacrifice precious holiday time to sort it all out.

It’s smart to exchange at least some of your foreign currency before you go – this way you can research the best exchange rate prior and avoid costly airport fees or being ripped off at your destination. Using your normal banking cards overseas can result in a whole lot of extra fees that you don’t need to be paying. Consider using a credit card designed for overseas travel, such as the 28 Degrees card that has no international transaction fees or currency conversion fees. Alternatively, purchase a pre-paid travel money card to withdraw cash or make purchases with, where you can lock in your exchange rate before you leave so there will be no surprises. A mix of cards and cash will ensure you always have a backup option.

Many of us have strict budgets to stick to on holidays, so why not try to save a little bit here and there where you can. You never know, you could come in under budget and treat yourself to that extra massage.

Source: Capstone.

Should you lend money to family?

By Robert Wright /June 26,2017/

You’re probably fairly used to helping your family out with a little extra cash here and there. Whether it’s pocket money for doing chores, or money to pay phone bills, go see a movie or buy clothes, for example.

But what happens when they put their hands out for help to buy the big ticket items? They might want some money to buy a car, pay for a holiday or even get a deposit together to buy their first home.

The question is, even if you can afford to help your family financially, should you? It could provide them with a helping hand that’ll really make a difference, but you also must ensure your needs are looked after and you’re not leaving yourself short.

Here are some things to think about:

Discuss how the money is going to be used. Is it something they could save up for or do they genuinely need your help?
Decide if you want the money back. Even if you can afford it now, think about whether you might need the money for other expenses or commitments later.
Agree on the terms of when and how the money will be repaid. If you decide on a loan, discuss how and when the loan could be repaid by, plus whether you will impose any sort of penalty (such as interest), if it’s not repaid on time.
Write it down. This might sound overly formal, but it sets the ground rules for making a true commitment to repay the loan.
Talk early and often to identify potential issues as they come up. Don’t wait until minor issues, such as late payments, become more serious.
Give them a refresher on managing money. This is a good way to really embed the principles of needs versus wants. Ask your family to work out how much they could put aside by using a savings calculator or budget calculator.
Ask for advice. If you’re lending a significant amount of money, you might want to check with your solicitor if there could be legal repercussions, including what happens to the loan if your child gets married or is in a de facto relationship.

Providing financial support in other ways

Gifting

It’s great, tax-free way of helping your family when they need financial help.

Just make sure you think carefully about whether your gift will put a dent in your retirement savings and if you’ll have enough for the lifestyle you want to lead when you wind down from work.

Also consider the impact on your Centrelink entitlements. If you’re receiving benefits, such as the Age Pension for example, a loan or gift to your child may impact on your payments and your financial security. You must tell Centrelink about any gifts or transfers within 14 days of when they have occurred.

Going guarantor

This is one way to help your family own their tomorrow ─ whether it’s buying a car or first home, but be careful not to put your own home or lifestyle at risk in the process. Make sure you only go guarantor for an amount that you can comfortably afford to pay if your family defaults on payments.

What else to consider

Whatever option you choose to help support your family:

Make sure the loan or gift is within your budget and won’t affect your everyday lifestyle or retirement.
Consider taking out insurance to cover you, or your family member, in the event of unforeseen circumstances.
It’s a good idea to get in contact with your financial adviser. Contact our office for more information

Source: AMP.